The Court of Appeal of the State of California, Second Appellate District, affirmed the trial court's decision sustaining the demurrer of Peerless Insurance Company ("Peerless"), to the complaint of its insured, Total Call International, Inc. ("TCI"), without leave to amend. The Court of Appeal held that the false advertising claims against TCI did not fall within the scope of the policy's coverage for "advertising injury" because the alleged false advertising claims against TCI by its competitors did not specifically refer to its competitors or its competitor's products. The Court of Appeal also held the nonconformity exclusion barred coverage for the false advertising claims against TCI by its competitors, because the false advertising concerned TCI's products.
TCI provides telecommunications services including pre-paid domestic and international phone cards. Peerless issued TCI a commercial general liability policy (the "Policy") that included coverage for damages because of "personal and advertising injury," which the policy defined as several enumerated offenses including "[o]ral or written publication, in any manner, or material that slander or libels a person or organization or disparages a person's or organization's goods, products or services." The Policy also had a nonconformity exclusion that precluded coverage for "'[p]ersonal and advertising injury' arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insured's] 'advertisement.'"
In March 2007, two competitors of TCI, IDT Telecom, Inc. and Union Telecard Alliance, LLC (collectedly "IDT") sued TCI, alleging damages as the result of TCI's advertising activities. Peerless declined to provide TCI a defense on the grounds that IDT alleged only that TCI's advertising misrepresented TCI's own phone cards and, therefore, IDT's claims fell outside the Policy's coverage for advertising injury and were barred by the nonconformity exclusion. TCI filed a complaint against Peerless alleging breach of contract and bad faith, and Peerless demurred. The trial court sustained Peerless' demurrer without leave to amend, finding that although IDT's claims potentially constituted advertising injury under the Policy, they were barred by the Policy's nonconformity exclusion. TCI appealed.
The Court of Appeal found that TCI did not allege any extrinsic facts pertinent to the duty to defend claim, so its inquiry was confined to only the allegations in IDT's complaint, which were incorporated by reference into TCI's complaint. IDT alleged that it offered high quality and low prices to consumers and had established good will. IDT further alleged that TCI sold phone cards that provided significantly less minutes than the actual minutes advertised by TCI. IDT alleged that TCI's false advertising had damaged IDT's reputation and resulted in lost market share because consumers had been misled to ignore IDT's phone cards and purchase TCI's falsely advertised phone cards.
The Court of Appeal held the Policy's "advertising injury" insuring clause covered "product disparagement and trade libel as well as defamation." These torts require an injurious false statement that specifically refers to the derogated person or product. The Court of Appeal held that IDT's complaint against TCI did not claim an injurious false statement within the scope of the Policy's coverage for advertising injury because IDT did not allege that any of TCI's false statements specifically referred to IDT or IDT's products.
The Court of Appeal rejected TCI's contention that references in IDT's complaint to IDT's damaged reputation were sufficient to raise a possibility that the claims were covered under the Policy. The Court held that "[t]he fact that the third party complaint mentions an element of a covered claim does not trigger the duty to defend when the facts known to the insurer, viewed as a whole, establish that no such claim is potentially asserted."
The Court of Appeal concluded that TCI's claims were barred by the Policy's nonconformity exclusion, noting that several courts have held a nonconformity exclusion "precludes coverage for third party claims predicated on allegations that the insured's advertising misrepresented the quality or price of the insured's own product." The Court of Appeal rejected TCI's contention the nonconformity clause was ambiguous, and could be reasonably construed as barring coverage only for claims by consumers, and not claims by competitors. The Court of Appeal held the language of the nonconformity exclusion contained no suggestion it was limited to consumer claims and looked to situations where other courts had construed nonconformity exclusions to preclude competitor claims.
The Court of Appeal affirmed the trial court's decision sustaining Peerless' demurrer without leave to amend because TCI failed to offer any amendments before the trial court or on appeal that would cure the defects in the complaint.
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